Hello justey,
How is your firm currently organized if not a partnership?
Are you organized as a C Corp or an S Corp?
Hello again justey,
With a C Corporation, you always have the issue of double taxation. Your corporation pays taxes at both the corporate level and then again at the shareholder level when those profits are passed through as dividends. Right now your C Corp pays corporate taxes on your profits at a rate based on your total profit level. Those profits are then passed through to the partners as qualified dividends. Qualified dividends are currently subject to a maximum tax rate of 15%.
However, that tax rate is set to expire at the end of 2010 and revert back to the prior rate of 20%. For that reason, if you remain a C Corp, you will automatically experience a 5% tax increase on all of the dividends paid through to you and the other partners. When you add that 20% tax to the tax that your corporation is already paying on those same profits, you will likely be much better off to be taxed as either a partnership or by choosing S Corp status.
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Thank you justey
Most C Corporations do not pay out the majority of their profits in salaries or bonuses. Instead they pay average or minimal salaries and declare the rest as dividends to the shareholders, because those dividends are taxed at a lower rate and are also not subject to SS and Medicare taxes.
If your C Corp is paying out all or the majority of your earnings in the form of salaries and/or bonuses, then the forthcoming tax increases will have little or no affect on you and the other partners.
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Accountant
25+ years tax consulting. Specializing in returns for US citizens living abroad